Energy regulator imposes £750,000 penalty on ScottishPower for failing to
justify £180 premium for different payment methods - but says £80
differential now charged by energy companies is fair

Energy regulator Ofgem has come under fire after claiming energy suppliers are justified in charging £80 more for not paying by direct debit - despite leaving most elderly and vulnerable customers worse off.

The ruling came as Ofgem announced that one supplier, ScottishPower, would pay a £750,000 penalty for failing to justify the unusually high premium of £180 it used to charge for non-direct debit payment methods.

But controversially the regulator concluded that the average £80 premium now charged by suppliers for customers with pre-payment meters or paying by standard quarterly bills was justified by the higher costs they entailed.

The regulator admitted that "low income customers and those in vulnerable situations", such as the elderly, would typically be left paying more, because they were "more likely to pay by means other than direct debit".

But after examining evidence from suppliers it said it "found no evidence to suggest that costs are being unjustifiably added to the bills of typical prepayment and standard credit customers".

"People should be able to choose how they want to pay without being ripped off. There is no justification that people should have to pay £80 a year if they don’t pay by direct debit."

Mr Halfon pointed to the example of small supplier First Utility, which slashed the premium it charges non-direct debit customers from £96 to £24 a year in the wake of his campaign. He said this charge appeared to be fair.

His initial investigation found that one small supplier, Spark Energy, charged up to £390 more for customers not paying by direct debit.

He said the ScottishPower penalty proved his point and was "an example of an energy company ripping off the customer for no reason whatsoever".

"What mystifies me is that Ofgem have now decided to back off and are not going to look properly into what other companies are doing," he said.

But a spokesman for Ofgem said that the higher costs did not just relate to costs of sending out bills.

He said: "Quarterly customers pay in arrears and as such the supplier is in effect offering credit. The supplier is therefore likely to incur some bad debt costs (e.g. customer not paying on time or not at all). As a result, suppliers build into this payment method a reasonable level of premium for this credit risk. This is the main reason behind price differences between standard credit and direct debit."

Ofgem said that in 2009 the differential between prices for customers on pre-payment meters and customers paying by direct debit was £140, but that had fallen to £80 in 2010 and remained at similar levels since. Customers paying by standard credit quarterly bills also paid about £80 a year extra than those with direct debits.

It found that "the differential paid by gas prepayment customers is typically below what would be justified in cost terms", implying these customers were actually already being subsidised by those paying by other methods.

The regulator said that any change would "create winners and losers" and said that large number of fuel poor customers did pay by direct debit and would lose out if they were forced to shoulder the costs for those who paid by other means.

A spokesman for consumer group Which? welcomed Ofgem's work on the issue. "Hard-pressed consumers shouldn't be unfairly penalised for the way they pay their bills, so it is right that all payment methods reflect the costs that suppliers face," they said.

In the ScottishPower case, Ofgem found that "between September 2009 and December 2012 ScottishPower did not have a robust process in place to assess the costs associated with different payment types and set prices accordingly".

It found that ScottishPower’s price differential between standard credit and direct debit payment methods had been "out of line with that of other suppliers", at £180.

"Since the investigation was launched, Scottish Power has significantly reduced its price differential," it said.

Scottish Power now charges £95 more for customers not paying by direct debit, which remains the highest of the Big Six suppliers.